Sumitomo Chemical Company, Limited (4005) Earnings Call Transcript & Summary

As it is time to start, we will now begin the conference call for the presentation of our financial results for fiscal year 2023. Thank you very much for your participation. Today, Mr. Sasaki, Managing Executive Officer, will give a briefing on our financial results for fiscal year 2023 and outlook for FY 2024. Later, he will be joined by Mr. Yamauchi, Executive Officer and General Manager of Accounting Department to take questions. We will conclude the call at 5:20. Mr. Sasaki, over to you.

Thank you. I'm Sasaki from Sumitomo Chemical. Thank you very much for attending our conference call despite your busy schedule. I'd like to thank investors and analysts for your daily understanding and support to our management. Thank you very much for that. Now let me start with explanation of our financial results for fiscal year 2023. Please turn to slide page 4. Consolidated financial results for FY 2023. Sales revenue was JPY 2,469 billion, down [ JPY 1,448.4 ] billion year-over-year. Core operating income expressing recurring earnings power had a loss of JPY 149 billion, which is down by JPY 241.8 billion year-on-year. Nonrecurring items not included in core operating income posted an impairment loss for Sumitomo Pharma's patent rights and goodwill and our Chiba plant essential chemicals manufacturing facilities and Ehime plant [ Mesa ]manufacturing facilities and the Singapore subsidiary MMA manufacturing facilities, totaling JPY 269.4 billion. In addition, restructuring costs of minus JPY 48.4 billion, including reorganization of Sumitomo Pharma's North America subsidiary led to a loss of JPY 339.8 billion. Last year also Sumitomo Pharma had an impairment loss of patent rights for [ Kimube ] treatment of episodes associated with Parkinson's disease. But compared to the previous year, this has worsened by JPY 216 billion. As a result, there was an operating loss of JPY 488.8 billion and income reduction of JPY 457.8 billion year-on-year. Finance income was JPY 26 billion, a worsening of JPY 5.2 billion year-on-year. Out of this, there was a gain on foreign currency transactions of JPY 32.5 billion because of a weakening of the yen, a worsening by JPY 3.3 billion year-on-year. Income tax expenses was JPY 2.7 billion, down JPY 44.4 billion year-on-year. As a result -- net income attributable to owners of [ parent ] posted a loss of JPY 311.80 billion, down by JPY 318.80 billion year-on-year. The exchange rate and no surprise, which affects our performance. The average U.S. dollar rate during the term was [ JPY 144.5 ] not surprise was JPY 69,100 per kiloliter. Yen weakened and feedstock price decrease compared to the previous year. Next is the sales revenue by business segment. Sales revenue in total decreased by JPY 448.4 billion year-on-year. Looking at [ restoration ] by segment, sales revenue declined in all segments. As for the year-on-year change of sales revenue analyzing by factors, sales price went down by JPY 143 billion, and volume dropped JPY 395.9 billion. Foreign exchange transaction variance of foreign subsidiary sales revenue increased by JPY 90.5 billion. The total core operating income decreased by JPY 241.8 billion year-on-year. Analyzing these changes by factor, in terms of price, this was a minus JPY 76 billion and cost, plus JPY [ 119.5 ] billion. On the other hand, volume variance, including changes in equity in earnings of affiliates was minus JPY 285.3 billion. Next, let me talk about the performance by segment. Essential Chemicals and Plastics segment, core operating income was minus JPY 90.7 billion, down JPY 56.5 billion year-on-year. For price variance, profit margins deteriorated mainly due to declining overseas market prices of synthetic resins. In volume [ variance ], there was a deterioration in the performance of Petro Rabigh equity method affiliate due to deteriorating refining margins and worsening profit margins for petrochemical products. Next is Energy & Functional [ Motor ] segment. Core operating income was JPY 7.8 billion, down JPY 7.4 billion year-on-year. Demand declined mainly for automotive applications and shipments of resorcinol and separators declined. Next page, IT-related Chemicals segment. Core operating income was JPY 44 billion down JPY 3.6 billion year-on-year. Price variance in display-related materials, selling prices fell for polarizing films for volume variance, treatments for photoresists and processing chemicals declined with a drop in semiconductor demand. On the other hand, shipments for polarizing films and touchscreen panels increased. Next page. Health & Crop Sciences segment. Core operating income was JPY 30.9 billion down JPY 26.4 billion year-on-year. Price variance issue to decline in the selling prices for generic products post-patent products in South America. Prop margin deteriorated due to a decline in market prices of methionine. For volume variance, there was an increase in methionine shipments. Next page, pharmaceutical segment. Core operating income was minus JPY 133 billion down JPY 149.2 billion year-on-year. Price variance, sales prices declined due to the impact of National Health Insurance drug price revision in Japan. Cost variance, selling costs and SG&A expenses decreased due to the reorganization and rationalization of Sumitomo Pharma's North American subsidiaries. Volume variance shipments decreased due to the expiration of exclusive marketing period of Latuda which was larger than the increase in cost. This is all for the performance of business segment. Next page is consolidated statement of financial position. Page 12, please. Total assets at the end of March 2024 was JPY 3.9348 trillion, a decrease of JPY 230.7 billion from the end of the previous year. The main reasons were a decrease in cash and cash equivalents, reduction in inventories to improve working capital and decrease in PPE and goodwill and intangible fixed assets due to impairment losses. Interest-bearing debt is JPY 1.5635 trillion up by JPY 102.1 billion over the end of the previous year. The equity was JPY 1.1644 trillion, down by JPY 324.8 billion from the previous year. Next, I will explain consolidated cash flows. Operating cash flow was negative JPY 51.3 billion, down by JPY 162.9 billion from the previous year. This was mainly due to a decrease in income before Indexes. Investment cash flow was negative JPY 112.2 billion, down by JPY 92.8 billion from the previous year. This is mainly due to the increase in loans to PetroRabigh. As a result, free cash flow was negative JPY 163.6 billion, down by JPY 255.8 billion from the positive JPY 92.2 billion in the previous year. Financing cash flow was JPY 49.2 billion, JPY 227.7 billion increase from the previous year. Next, I will explain the revised full year forecast for FY '24. First, I will explain the business environment surrounding our company that is the premise for our full year forecast for FY '24. This is Page 15. Regarding economic conditions, inflation is expected to slow down worldwide, and the global economy is expected to stabilize, but low growth rate is expected. I will only mention some distinctive points of FY '24 forecast compared to [ FY '20 actuals ]. First, regarding the petrochemicals and raw materials at the top, we believe petrochemical market bottomed out in FY '23. And will gradually recover towards FY '24. But the extent of the recovery is limited and the low margin will continue. Next, regarding the semiconductors, fourth from the top, that headed for a gradual recovery and full-scale recovery is expected towards the second half of the year. As for the crop protection, third from the bottom, Overseas distribution inventories are being eliminated. And as a result, we expect the recovery of sales volume, especially in South America. This has been the main business environment for FY '24. Next, I will explain consolidated business forecast on Page 16. For FY '24, our forecast has not changed from what we announced on April 30. As revenue will be JPY 2.670 trillion, up by JPY 223.1 billion from the previous year. Core operating profit will be JPY 100 billion up by JPY 2,249 billion from the previous year. Operating income will be JPY 70 billion, up by JPY 558.8 billion from the previous year. Next, net income attributable to owners of the parent will be JPY [ 220 ] billion, up by JPY 331.8 billion. Thus, we like to increase in sales and profits. The assumptions for exchange rates and naphtha prices are as shown on the slide. We will make utmost efforts to achieve [ ship ] recovery in FY '24. I will discuss the sales revenue and core operating income by segment from the next page. We expect the increase in operating income and net income attributable to owners of the parent, thanks to the improvement of core operating income as well as the reduction in impairment losses and expenses for business restructuring. As for our dividend for the current year, we will pay an interim dividend of JPY 3 and year-end dividend of JPY 6 per share. Thus, the annual dividend will be JPY 9, the same as the previous year. Next, I will explain the sales revenue and core operating income by business segment on Pages 17 and 18. Sales revenue for FY '24 is JPY 2.670 trillion, up by JPY 223.1 billion from FY '23. By segment, we focus to increase in revenue in all segments, except Energy & Functional Materials and IT-related Chemicals. Looking at the analysis of area, sales price is plus JPY 79.5 billion, volume is plus JPY 168 billion and foreign exchange for the sales revenue of overseas subsidiaries is minus JPY 24.7 billion. Please turn to Page 18. Forecast for core operating income is JPY 100 billion, up by JPY 249 billion from FY '23. We expect to increase in profits in all segments. By variance analysis, positive JPY 19 billion for price, positive JPY 141 billion for cost difference and positive JPY 89 billion for volume, et cetera, including changes in equity in earnings of affiliates. Let me now explain the consolidated cash flows. Focus for operating cash flow is JPY 160 billion, increased by JPY 211.3 billion from FY '23. Investment cash flow will be JPY 110 billion up by JPY 222.2 billion over FY '23 due to the short-term intensive business improvement measures. This will result in positive JPY 270 billion in free cash flow. Interest-bearing debt balance at the end of FY '24 is expected to be JPY 1,320 billion. That is all regarding the focus. And for the first half, we decided not to disclose that the forecast because it is difficult to expect. And so we will make a company-wide efforts to achieve a V-shaped recovery because this is the top priority items. And that will include the restructuring or the rationalization, but it is difficult to expect the timing or not -- it is not appropriate to actually disclose timing. And so we decided not to disclose the interim forecast. And thank you for your understanding. And as for the FY '24 the performance, we will still see the loss in the first quarter. But after that, towards the end of the fiscal year, we expect the gradual improvement. And that is all I have to say on business report. I would like to take your questions now.

Now let's receive questions. Now, we'd like to receive the first question from Morgan Stanley, MUFG Securities, Mr. Watabe.

This is Watabe speaking. My first question is about your measures to improve your revenue in a short period of time last fiscal year and this fiscal year, you include about JPY 20 billion in the previous year, but that is not allocated by segment? So what was that influence? And what is your forecast for this year? In the medium-term concentrated measures to improve business performance, in FY '23, we implemented some measures and already they have been announced. For example, in the Health & Crop Sciences sector, post-harvest business sales, that was one thing that was done and some businesses withdrew from some businesses. In FY '23, the influence was not that large. And already, we have announced, for example, in the [ Pigment ] business or China LCD Chemicals, in FY '24 -- towards FY '24, there are some businesses that will be affected. But to a certain extent, I can tell you the amount, but because there is a counterparty and it's a matter of timing. I cannot tell anything in concrete, but this has been included to a certain extent. On the 30th of April, material, it was mentioned that for FY '23 and '24, comparing those 2 years, the immediate-term concentrated measures about JPY 3 billion was the figure described. By segment, is that being included?

Yes, to a certain extent, they're included. And under others, also some items are included.

Others is plus which include this. Others is JPY 20 billion. So by segment, it would be about JPY 10 billion?

Yes. under others, yes.

FY '23 said there was not much influence. But for IT-related [ chemicals ], a profit in the fourth quarter. So that was based on your actual real capability and also from Crop Sciences, right?

Yes.

In some areas of IT-related chemicals, they were doing well. And I think it's right to say that, that is our capability. But for Health & Crop Sciences, we've achieved the forecast. So fourth quarter didn't grow as much as we had expected. To consume inventory in the distribution process, didn't proceed as we have expected. And FY '24, there may be a reaction to that, we expect positive shipments. For Health & Crop Sciences, the current environment in Brazil, trend of generic price, you expect higher prices, mainly for methionine? Is that the factors you expect for this year?

Yes. This year, for Health & Crop Sciences, we are assuming positive price. As you mentioned, methionine. And also for crop [ protection ] chemicals, generics or post-patent products, price is declining quite a lot in FY '23. Compared to that, price itself will be recovering. That is what we expect. Besides price, in terms of volume in South America, we expect expansion of sales. So inventory in the distribution will gradually decline. In North America and South America, we expect expansion of sales.

Yes. Understood. This is not a question, but for confirmation, you can answer later. The SG&A in your fourth quarter is increasing by about JPY 200 billion compared to the third quarter. I hope you can answer that to me later. Thank you very much.

Thank you, Mr. Watabe. Let's move on to the next question from Mizuho Securities. Yamada-san, please.

This is Yamada from Mizuho. I have 2 questions. Thank you. First question. I don't know how much you can disclose, it's about the essential chemicals improvement situation and also loan to PetroRabigh. For the essential chemicals, I see the reduction of the loss. And so I got 227 -- it's like it's [ PetroRabigh ] and receiving the payments difference. And so looking at the others for there is the increase for the fixed assets. And so if it's a loan, it's like JPY 100 billion. And of course, the ForEx the changes may be affecting. And so if -- am I correct to assume that it's a large amount of cash outflow? And that is that like investment or the loans? Is that -- does it play a major role or is it for the [ JV ]?

Well, your question covers a quite large scope. So let me try to answer one by one. First of all it's regarding the earnings of the essential chemicals. And for the price difference or the cost difference, Yes, we expect a certain amount. But also, we expect some difference in volumes. And so regarding the PetroRabigh, I am not able to answer to your question, but it is included to some extent. And on the other hand, for the usual expansion of the sales, in our explanation, I talked about the business environment. And overall, we do not expect the rapid growth. But compared with FY '23, we believe that there will be some improvement. And also for some products, for example, there may be a level of increase for licensing and those may have some impact. And that will result in the difference of the volume. And therefore, the receiving payment difference is not including. Well, we have -- the price of the naphtha is like JPY 75,000. And so we do not expect a very large difference.

This is a comparison from the previous year. Thus, year, it was -- the difference was negative because the decline of the naphtha price better this year, it's the positive. So there will be some kind of some billion yen, but the large amount itself is not a very large one, right?

That's correct.

And for the loans to PetroRabigh?

So there may be some impact of the foreign exchange. But currently we have the loan of the $750 million. And so that's the amount. And if they want the demand of the cash, we do offer the loan. And according to the current -- the agreement, that's the limit that we will not expect any further. And so we have hit the selling. And this is a subject of the [ debit ]. What I mentioned is the loan from our company. And so it's on our [ BS ].

But what you say, debit, is that it's a project finance, you are mentioning project finance, right?

Regarding the project finance itself, not only for the [ debit ] but therefore others. If there are the -- there is the guarantee we will join. And that's for the project finance. There is the termination. And so we will not guarantee the whole amount. But what is the put on the footnote is the -- for onetime payment that actually for June and December, PetroRabigh is making the payment in those cases. And so onetime payment, we guarantee the 50% of that for onetime. And so the project finance-related amount is not a very large one.

I see. I didn't have a good understanding. And next question, please? The second question is also probably it may be difficult for you to answer, but this is a pharmaceuticals. And the price difference is 0 for the FY '24. What is the impact of the price -- the price reduction -- impact of the price reduction. The impact of the price cut is not a very major one. And so in our analysis, it's 0. So that's the impact of the price cut. And so it may not be exactly 0, but the amount is not a very large one. And so the amount is so small that can be absorbed from other items. So it's not really meaningful in terms of the analysis. Is that correct? Yes. That's correct.

Thank you very much, Mr. Yamada. Next question is from SMBC Nikko Securities, Miyamoto-san.

I'm Miyamoto, SMBC Nikko Securities. I have 2 questions. One, for Health & Crop Sciences sector performance. The fourth quarter post-harvest-related were sold and a certain level of profit was recognized. And where is that included in the core operating income, Page 10. Is that included in the volume variance? And on Page 29, on the variance, JPY 42.4 billion and plus JPY 9.6 billion in terms of volume variance. In terms of marginal profit, the volume variance increase seems to be [ mowed ]. Is that related to post-harvest? And related to that, [ entering ] a biovessel, what is the -- was the trend in the previous year and your forecast for next year?

For FY '23 Q4 business divestiture, as you mentioned, that would be included in the volume variance. So for comparing FY '24 and '23, for Health & Crop Sciences on volume variance may seem small. So that factor is included partially. So you're right. And for [ differing ] was launched FY '24 will be the third year since the launch. Situation on South America in the last 1 or 2 years was not as good as we had expected. For FY '24, distribution inventory issues, we expect it will be resolved. So we expect sales to be very aggressive. So we included a certain level of expansion of sales. About JPY 20 billion increase in revenue can be expected for [ in differing situation ] of [ biorationals ]. And the volume variance, I understood your point, but still, the volume variance compared to JPY 62.4 billion of revenue. Increase in profit seems to be low. I think there was more than JPY 10 billion in terms of the gains from the sales of the business. I am not in a position to answer your question about the actual amount. But [ in differing ] and others, sales scale I can say expect a certain level of revenue increase. And biorational, for this, I can't tell you the actual amount. But in terms of growth, maybe more than 10% or nearly 20% increase can be expected.

My second question is about ag-related chemicals. Three months ago in your forecast, you said you expect the core operating income to increase by about JPY 6 billion. Could you give me the details. And on Page 28, you have a figure [ survey ] a new fiscal year, cost variance is plus JPY 2 billion. And from display materials, polarizing films, there has been quite a lot of restructuring. So I expected large increase, but cost of semiconductors may be increasing. What is your forecast for the new fiscal year?

First, in Q4 more than we had expected, the result was better from what we had forecasted. Major factors is display-related materials, OLED related and touch screen panels, [ less ] touch increased more than we had expected. Growth was not that large, but compared to our forecast, it was not that large. But semiconductor materials were better than our forecast in the fourth quarter. On the other hand, this fiscal year, FY '24, compared to FY '23, as increase in profit income, we expect about JPY 3 billion increase. So there's quite a lot of a negative in the price variance for films, certain price decline is expected. And for cost variance, it's JPY 2 billion, which is not that large. That may be your impression. But with rationalization, we went through [ urbanization ] and for polarizing panels, clients were stopped and were shifted to automotive use. There are a lot of restructurings taking place. So the effect of rationalization will be reflected. On the other hand, as you know, our semiconductor materials, FY '23 and '24, there are plants that will be starting, so new plant, depreciation will increase. So cost variance because of that will not be that large. That is how you should interpret. And expansion of sales is expected which is reflected in the volume of areas. Photoresist, polarizing films, semiconductor films, which areas will have a larger increase in sales. Films are included, semiconductor materials are also included. Both are included.

Understood. Thank you very much.

Thank you very much, Mr. Miyamoto. Next question from Daiwa, Umebayashi-san ].

Thank you. About the essential chemicals. And so the situation in Japan and Singapore, could you give us your thoughts. Could you share your thoughts about those, the environment of the business for FY '24?

In Japan, in the Singapore, first of all, Japan and Singapore, yes, and both applicable. And in FY '23, there was a periodic shutdown maintenance. And compared with that, '24, FY '24, the situation is different. And for others, in FY '23, the Chiba plant and Singapore MMA had the -- have a [ bit ] there's some business environment, the improvement can be expected, although the actual extent is not a very big one. And based upon those, we have come up with the forecast.

Thank you. The second question, maybe it's difficult for you to answer Earlier, you mentioned that it's difficult to disclose the first the half. But that you gave us the idea that the Q1 is the loss, but it will be the improvement later on. And for the Q1 in terms of the segment, the social chemicals and the pharmaceuticals are the difficult segments. Is that correct understanding? And then after Q2, you would expect the improvement and do you mean that from the Q2, do you think you will see some profits?

Thank you for your question. And yes, it's true. It's difficult for us to answer. But as you mentioned, as you suspected, for the PetroRabigh, the impact from January to March, and that is included. And other than that, it's difficult to say, but we have been taking various measures such as, for example, in the pharmaceuticals, we see the gradual improvement especially for the North America, the business restructuring or the structural reform, was implemented, and we will see the impact gradually. And the -- in the [ forecast of ] Q1, there may be not full-fledged the effect was seen. But after Q2 and the later, we expect improvement. But in terms of the amount or the extent, it's difficult to explain now. In addition to that, there are some the selling of some business and others, the reorganization could take place. And so -- and that may have some impact -- [ operational ] impact. And so we don't want to mislead or have them the suspect. And so thinking of that, we decided not to disclose the first half.

Thank you very much, Mr. Umebayashi. We are approaching for time to conclude. So the next question will be the last question. And please limit to 1 question from Nomura Securities, Mr. Okazaki.

Thank you, I'm Okazaki from Nomura Securities. On the 30th of April, the [ material ] page 6, cost reduction rationalization, JPY 33 billion is written. But in this material this time from Pages 26 to 29, cost variance, basically, I think this is the subject. And [ high-purity ] chemicals, there may be increases, which may not necessarily match. Is that right? And the JPY 30 billion for this year, that is reflected in the volume variance of each segment. What is the breakdown of this yen? That is all. Thank you.

Thank you for your question. First, as for your first question yes, you are right. And for the medium-term concentrated measures, yes, you are right. Basically, in each segment, it is reflected in the volume variance. And the scale, whether it is large or small, at the moment, I'm sorry I cannot mention that.

Thank you very much. That is all for me. Thank you. Thank you very much.

Now this concludes the Q&A. So Mr. Sasaki have a few words at the end.

Thank you very much for your participation. Our -- the performance in FY '23 was quite poor. And compared with that for the FY '24, we are determined to achieve the V-shaped recovery. And also, we will strengthen our damaged financial position. And we appreciate your continuous support. Thank you very much.

This concludes today's conference call. Thank you very much for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]